Beijing Hanyi Innovation Technology (SZSE:301270) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Beijing Hanyi Innovation Technology (SZSE:301270), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Beijing Hanyi Innovation Technology is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.034 = CN¥36m ÷ (CN¥1.1b - CN¥53m) (Based on the trailing twelve months to December 2023).

So, Beijing Hanyi Innovation Technology has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 5.7%.

See our latest analysis for Beijing Hanyi Innovation Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Beijing Hanyi Innovation Technology.

What The Trend Of ROCE Can Tell Us

In terms of Beijing Hanyi Innovation Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.4% from 17% five years ago. However it looks like Beijing Hanyi Innovation Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Beijing Hanyi Innovation Technology has done well to pay down its current liabilities to 4.7% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Beijing Hanyi Innovation Technology's ROCE

To conclude, we've found that Beijing Hanyi Innovation Technology is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Beijing Hanyi Innovation Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

While Beijing Hanyi Innovation Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.